Key revenue drivers for the hotel industry

Key revenue drivers

We understand how a hotel group like Hilton generates revenue from their hotel properties. In this part of the series, we’ll learn about the metrics that influence a hotel’s revenue. The metrics include:

• Revenue per available room (or RevPAR)
• Occupancy rate
• Average daily rate (or ADR)

The metrics are used to analyze each segment’s performance. They also analyze the group as a whole.

Revenue per available room (or RevPAR)

RevPAR is calculated by dividing hotel room revenue by the total available room nights. It’s used in the hotel industry to measure the company’s ability to generate greater revenue from each room. RevPAR can be improved by increasing the occupancy rate or the average daily rate per room. Hilton reports RevPAR for comparable hotels. In fiscal year 2013, Hilton’s system-wide RevPAR increased by 5.2% to $98.65. It was driven by an increase in occupancy and average daily rate.

The company defines comparable hotels as hotels that are operating for at least one full calendar year without any change in brand or ownership during the reported period. Comparable hotels also don’t have any property damage, business interruption, or large scale capital projects for which comparable results aren’t available.

Average daily rate (or ADR)

ADR is a measure of the average room price for which the hotel rooms are sold. It’s calculated as hotel room revenue divided by the number of rooms sold. This depends on the chain scale segments that hotels are categorized in. The categories are based on their average room rates. Chain scale segments include Luxury chains, Upper Upscale chains, Upscale chains, Upper Midscale chains, Midscale chains, and Economy chains. ADR is an important indicator because it influences the hotel’s revenue and profitability. All major hotels—including Hilton (HLT), Hyatt (H), Marriott (MAR), Wyndham (WYN), and Starwood (or HOT)—categorize their hotels according to chain scale segments. The ADR for Hilton’s hotels increased by 3.3% to $136.49 in fiscal year 2013. 

Occupancy

Occupancy measures the utilization of a hotel’s capacity. It measures the percentage of the total available rooms that are sold by the company during the period. It’s calculated as the total number of rooms sold divided by the total number of rooms available at a hotel. It gives meaningful information about demand for the hotel’s services. Hilton’s occupancy increased by 1.3% year-over-year (or YoY) to 72.3% in fiscal year 2013.

Investors can buy Hilton’s share directly or through exchange-traded funds (or ETFs) like the PowerShares Dynamic Leisure and Entertainment Portfolio (PEJ) and the First Trust U.S. IPO Index Fund (or FPX).